Insider view on how to deal with the Housing Crisis in California.

By John E. McNellis, Principal at McNellis Partners, for The Registry:

Governor Jerry Brown just signed fifteen affordable-housing bills into law. A few might do a little good. Two senate bills will raise a bit of money. Senate Bill 2 will charge you a recording fee of up to $225 on any transaction not already subject to a transfer tax (e.g. a mortgage refinance). Senate Bill 3 is a $4 billion housing bond. Most of the money raised from these two efforts will go toward funding low-income housing.

Assembly Bill 1505 will allow cities to once again require an affordable housing component in new residential projects, a requirement that had been ruled unlawful by the Court of Appeal in 2009. Jerry’s other new laws are, in a word, fluffy, well-intentioned but toothless efforts to spur cities on to do the right thing.

About the money. According to the Los Angeles Times, San Francisco’s 700 unit Hunters View low-income housing project cost $450 million or $643,000 a unit. While appallingly high, that number sounds about right. Thus, if SB2 actually raises $250 million a year, California could add another 388 low-income units annually. And the whole $4 billion from SB 3 would be gone after 6220 new units. In a state which needs to add 100,000 new dwellings a year just to keep up with its population growth — and not allow the housing crisis to worsen — this is truly spitting in the ocean.

But as paltry as it may be compared with the enormity of the crisis, the money is not the real problem. The problem is you can’t spend affordable-housing money. Last year, the citizens of Los Angeles generously voted to increase their property taxes by $1.2 billion to build housing for the homeless. This year, the somewhat less compassionate Angelenos in Boyle Heights blocked a proposed 49 unit homeless shelter in their neighborhood, a political scenario that has been played out countless times in nearly every city in the state. Tie-dyed progressives, kindhearted liberals, even Orange County conservatives are all in favor of low-income housing — in someone else’s neighborhood.

You can be squarely against capital punishment, but still suggest a better alternative than a circular firing squad. You can know that the housing crisis is not the fault of real estate, that blaming the housing industry for failing to build low-income is nonsensical, that it is a societal issue which must be resolved — and paid for — by society as a whole, yet still wish to encourage an approach that would at least help solve the problem.




For the record, that 2009 appellate court threw out low-income requirements on market-rate housing projects because it found no nexus between building new housing and a lack of affordable housing. Tipping its gavel to rationality and the law of supply and demand, the court found to the contrary: Any new housing, at whatever price point, helps the overall housing situation. If you build enough million dollar condos, sooner or later your market will crash, prices will plummet, and availability will rise all the way down the line.

One partial solution to the housing crisis that is unlikely to be adopted anytime this century by California is simply this: Remove the spurious, project-killing California Environmental Quality Act (CEQA) lawsuit from the arsenals of the unions and the NIMBYs. How? Easy. Require would-be CEQA plaintiffs to post a meaningful bond in order to file suit and then be liable for the losses incurred by the project as a result of the delays should they lose. Or eliminate the attorney’s fees recovery provision in the law; if the NIMBYs — and, more importantly their lawyers — know they have to pay the fees themselves, unfounded lawsuits will plummet.

Another suggestion unlikely to be a crowd-pleaser would be to pass a version of Massachusetts 40B. Adopted in 1969, this still controversial law allows local zoning boards to overrule the rejection of proposed housing projects by cities if the city in question has less than 10% affordable-housing in its community and the project has a 25% affordable-housing component. While not a panacea, about 80% of Massachusetts’s affordable housing built over the past decade is a direct result of this bill.

Thus far, my developer readers are nodding in approval, but here’s where I lose them: If you truly wish to add low-income housing, ban the practice of allowing builders to pay in-lieu fees instead of incorporating the low-income housing into their projects.

Why? First, as outrageous as they appear at first blush, the in-lieu fees are never enough. No city is charging the real cost of a unit, that $643,000 Hunters View cost. Second to none in spanking developers, San Francisco’s in-lieu fee for a two-bedroom unit is still only $366,369.

And, again, it’s not the money, it’s the dirt. Back to Boyle Heights, off-site units seldom get built. Say San Jose enacts a 15% low-income requirement — it has — and then entitles ten 100-unit apartment projects throughout the city. If an on-site requirement, the low-income folks are spread throughout the city — a good thing for many reasons; their children can attend better schools and so on — and the inevitable NIMBY protests are, while not exactly muted, of insufficient volume to terrify the city council.

If, on the other hand, the 10 developers pay the insufficient in-lieu fee and then the city picks a spot on which to subsidize and build a 150 unit low-income project, its immediate neighbors will tie themselves to the railroad tracks to prevent it.

Kill the in-lieu fee. In its place, grant developers the bonus density they need on their market-rate projects to incorporate the low-income units and still achieve a reasonable return on investment.

To solve the housing crisis, the state needs to encourage market-rate housing through streamlining the zoning process, pay for low-income housing through general taxation and stand up to all of those who would either prevent new housing or render its cost prohibitive. California’s housing is bleeding out and we’re applying Band-Aids. By John E. McNellis, McNellis Partners, author of Making It in Real Estate: Starting Out as a Developer. The article was first published on The Registry.

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